WAPO's Major Article on the Future of Manufacturing Never Once Mentions the Value of the Dollar

Wow, you just have to sit back in awe at something like this. Imagine the lead sports story the day after the Superbowl. It talks about who had a good day, the big plays, the big mistakes, and it never once mentions the score of the game. That is pretty much what the Post managed to do in a front page business section piece on the future of manufacturing in the United States.

If the Post noted the value of the dollar, which is the prime determinant of the relative cost of good produced in other countries and good produced in the United States, then it could have worked through some simple logic. The United States as a country will continue to consume manufactured goods. It is likely that thirty or forty years in the future we will still have cars, computer-like objects, houses made of manufactured materials, etc.

If we don't manufacture these items here then we will have to import them. If we will import them, we will either have to export something else to pay for these imports or the rest of the world will have to give us manufactured goods for free. Something like the latter is happening now as China and other developing countries are buying up dollar denominated assets to keep up the value of the dollar against their currencies.

Essentially they are paying us to buy their stuff by making their products cheaper than they would otherwise be. This seems to be a useful development strategy at the moment, both because it helps to harness demand for their products and also because it allows them to accumulate massive amounts of dollar reserves which they believe are essential in an incompetently managed international financial system.

However, it is unlikely that situation will exist forever. China and other developing countries can pay their own people to buy their stuff, so it is not essential for them to indefinitely maintain huge export markets in the United States. Also, at some point they will presumably have enough reserves to get them through an conceivable financial crisis.

This then raises the issue of how we will pay for the goods we import. While the popular line is "services," this is mostly said by people who have not looked at the data. We would need an incredible a five-fold expansion of our surplus in services to even cover our current deficit. It would need to grow by a factor of ten if we lost all manufacturing in the U.S..

Furthermore, many trends in services point in the opposite direction. For example, we already have a large deficit with India in software services. This will certainly grow larger over time, and Indian software engineers will almost certainly drive us out of third countries as well.

We have a surplus on financial services, but this may slip if taxpayers got tired of subsidizing too big to fail Wall Street banks. One growing area of service exports is fees for royalties on patents and copyrights. This may grow if we have the economic and military power to impose more protectionist trade pacts (called "Free Trade Agreements" in Orwellian Washington newspeak), but that seems unlikely as countries like India are frequently insisting on paying free market prices for drugs.

The one rapidly growing area of surplus in services is tourism. Perhaps the future American workforce will be cleaning toilets and making beds for the rest of the world, since we will no longer be set up to manufacture goods.

Alternatively, the dollar might just fall so that the U.S. is again competitive in manufactured goods. That is the econ 101 story.